Final answer:
The equity method of accounting for an investment creates a temporary difference and results in a deferred tax liability. Equity in a home is calculated by subtracting mortgage debt from the home's value; for instance, a $20,000 equity from a $200,000 home purchase with a 10% down payment. .
Step-by-step explanation:
When a company uses the equity method to account for an investment, it will result in a temporary difference on the company's financial statements. This is due to the fact that the investor's share of the investee's earnings is reported on the income statement, and these earnings are not taxable until they are actually distributed as dividends. As a consequence, this creates a deferred tax liability since there will be tax payable in the future when the earnings are distributed.
To answer part three of the student's question, we will calculate the equity for a person who has bought a house. Equity can be calculated as the difference between the value of the home and the outstanding mortgage debt. If Eva bought a house for $200,000 with a 10% down payment, her initial equity would be 10% of the home value, which is $20,000. The rest, $180,000, represents the debt she took on as a mortgage.
Lastly, the money listed as assets on a bank balance sheet represents loans made, investments, and reserves, not just cash on hand. Liabilities include deposits made by customers, which the bank owes back to them. This is why the balance sheet might show a certain amount as assets, but not all of them would be present as cash in the bank.